Analysis of New Hampshire's policies

As of June 30, 2015, the most recent date for which an actuarial valuation is available, New Hampshire's pension system for teachers is 55.3 percent funded, an increase of 1.3 percentage points since NCTQ's last report. Its current pension debt exceeds $11,600 per pupil throughout the state. It also has a 22-year amortization period. This means that if the plan earns its assumed rate of return and makes its full actuarially determined contribution payments, it would take the state 22 years to pay off its unfunded liabilities. While its amortization period meets regulatory benchmarks, New Hampshire's funding level is too low. The state's system is not financially sustainable according to actuarial benchmarks.

In addition, New Hampshire commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 15.67 percent is too high, in light of the fact that districts must also contribute 6.2 percent to Social Security. While this rate allows the state to pay off liabilities within a 22-year period, it does so at a high cost, precluding New Hampshire from spending those funds on other, more immediate means to retain talented teachers. The mandatory employee contribution rate to the defined benefit plan of 7 percent is reasonable.

New Hampshire Retirement System, Actuarial Valuation Report (draft), as of June 30, 2015.

Recommendations for New Hampshire

Ensure that the pension system is financially sustainable. The state would be better off if its system was over 95 percent funded to allow more protection during financial downturns. However, New Hampshire should consider ways to improve its funding level without raising the contributions of school districts and teachers. In fact, the state should work to decrease employer contributions. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention and crowd out funding for other areas in education.. Improving funding levels necessitates, in part, systemic changes in the state's pension system. The goals on pension flexibility and pension neutrality provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

New Hampshire was helpful in providing information that enhanced this analysis.

Exiting Ineffective Teachers

Pensions

How we graded

Research rationale

Many states' pension systems are based on promises they cannot afford to keep.

Teacher salaries are just one part of the compensation package that teachers receive. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, nearly all states continue to provide teachers with a defined-benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers.

Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.

Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.

The contribution of employers to their workers' retirement benefits is a valuable benefit, important to ensuring that individuals have sufficient retirement savings. Compensation resources, however, are not unlimited, and they must fund both current salaries and future retirement benefits. Mandated employer contributions to many states' teacher pension systems are extremely high, leaving districts with little flexibility to be more innovative with their compensation strategies. This is further exacerbated for states in which teachers also participate in Social Security, requiring the district to pay even more toward teacher retirement. While retirement savings in addition to Social Security are necessary, states are mandating contributions to two inflexible plans rather than permitting options for teachers or their employing districts.

This approach to compensation disadvantages teachers early in their careers, as the commitment of resources to retirement benefits almost certainly depresses salaries and prevents incentives. Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up compensation resources to implement the kinds of strategies suggested elsewhere in the Yearbook. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.